PHASE 3 MEDIA, LLC v. DRAKE

Filing 12

MEMORANDUM AND ORDER that Defendant's 8 MOTION to Vacate Default and File an Answer or Responsive Pleading is granted. The Answer or Responsive Pleading must be filed by 6/27/2018. Signed by Judge Peter G. Sheridan on 6/6/2018. (mps)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

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PHASE 3 MEDIA, LLC,
Plaintiff,

v.
KYLE W. DRAKE,
Defendant.

Receiver
JUN 06 2018
AT8:3o_
WILliLIA"M~T.~.
w.~~-LS-H--M
CLERK

Civil Action No:
l 8-cv-3387 (PGS)(LHG)

MEMORANDUM
AND
ORDER

Presently before the Court is Defendant Kyle Drake's Motion to Vacate Default Judgment
that was entered against him on April 9, 2018, pursuant Federal Rules of Civil Procedure 55(c)
and 60(b), and to file an answer or responsive pleading. (ECF No. 8). For the reasons set forth
herein, Defendant's motion is granted.
BACKGROUND

The matter stems from allegations of wrongful misappropriation and theft of trade secrets
by Defendant against his former employer, Plaintiff Phase 3 Media, LLC (hereinafter, "Phase 3").
According to the Complaint, Phase 3 is a digital marketing and public relations agency that makes
promotional products for customers. (Complaint at if 7). A critical aspect of Phase 3 's business is
the use of"Quick Base" software, which ''is a web-based rapid application development software."
(Id. at if 9). Defendant, who had worked for Phase 3 for over ten years, was the company's Quick

Base account manager. (Id. at irir 6, 11). This being said, on December 28, 2017, Defendant left
Phase 3 to join Diversified Global Graphics Group (hereinafter, "DG3"), another business
marketing and communications company. (Id. at if 6). Before leaving Phase 3, however, Defendant
allegedly emailed himself Phase 3 's Quick Base account, using his DG3 email address. (Id at
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if

23). As such, on March 9, 2018 Phase 3 initiated the present matter, asserting claims of: (1)
misappropriation of trade secrets under the Defend Trade Secrets Act, 18 U.S.C. § 1836; (2) breach
of the duty of loyalty; and (3) conversion. The following month, April 9, 2018, default was entered
against Defendant.
In his affidavit in support of vacating default judgment, Defendant provides an explanation
for his failure to respond to Phase 3's Complaint. (ECF No. 8-1, "Drake Affidavit"). Apparently,
after being served with the Complaint, DG3 agreed to represent him and attempted to settle this
matter with Phase 3. (Id. at , 11). "Counsel for DG3 and [Phase 3] engaged in substantive
settlement negotiations up to March 30, 2018," leading Defendant to believe that "the matter would
be resolved, the lawsuit dismissed, and [he] would not need to retain counsel." (Id. at ,, 12-13 ).
However, on March 30, 2018, Defendant was informed that settlement discussions were not
successful, that DG3 would not be representing him in the lawsuit, and that he had less than a week
to retain counsel to answer the complaint. (Id. at ,, 14-16). According to Defendant, Phase 3
never informed him that he was in default or that it intended to seek default judgment against him.
(Id. at , 19). On April 25, 2018, Defendant filed the present motion to vacate default judgment

and to assert an answer to Phase 3's Complaint. (ECF No. 8-2).
LEGAL STANDARD AND ANALYSIS

The decision to set aside an entry of default under Federal Rule of Civil Procedure 60(b)
is left to the sound discretion of the district court. United States v. $55,518. 05 in U.S. Currency,
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728 F.2d 192, 194 (3d Cir. 1984). In deciding whether to set aside a default, courts must consider
the following factors: "( 1) whether lifting the default would prejudice the plaintiff; (2) whether the
defendant has a prima facie meritorious defense; (3) whether the defaulting defendant's conduct is
excusable or culpable; and (4) the effectiveness of alternative sanctions." Emcasco Ins. Co. v.

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Sambrick, 834 F.2d 71, 73 (3d Cir. 1987). However, ''in a close case doubts should be resolved in

favor of setting aside the default and reaching a decision on the merits." Gross v. Stereo Component
Systems, Inc., 700 F.2d 120, 122 (3d Cir. 1983}. The Court addresses each factor below.
1. Prejudice to the Plaintiff

Prejudice is found where a plaintiffs ability to pursue his or her cause of action is hindered
by the "loss of available evidence, increased potential for fraud or collusion, or substantial reliance
upon the judgment to support a finding of prejudice." Feliciano v. Reliant Tooling Co., 691 F.2d
653, 657 (3d Cir. 1982). Delay in adjudicating the claim, however, "rarely serves to establish the
degree of prejudice sufficient to prevent the opening a default judgment entered at an early stage
of the proceeding." Id. Here, Plaintiff points to no identifiable prejudice. In conclusory fashion,
Plaintiff asserts that lifting the default judgment would result in delays in discovery and create a
risk of potential loss of evidence. However, there has been no actual allegation that evidence has
been lost or that Defendant poses such a risk. In fact, in his affidavit, Defendant certifies that he
"authorized [his] current counsel to turn over the hard drive to a forensic computer specialist of
plaintiffs counsel's choosing so it can be copied an analyzed." (ECF No. 10-1 at ~ 9). As such,
the risk of losing evidence seems to be lacking and, therefore, the Court weighs this factor in favor
of vacating the entry of default.
2. Meritorious Defense

Under factor two, the Court must consider whether Defendant has presented a meritorious
defense; that is, "when 'allegations of defendant's answer, if established on trial, would constitute
a complete defense to the action."' $55,518.05 in U.S. Currency, 728 F.2d at 195 (quoting Tozer
v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951)). Defendant need not prove

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that he will ultimately prevail at trial, but he must demonstrate that he has a facially meritorious
defense, not one based on mere denials and conclusory language. Id.
Here, Defendant has presented facially meritorious defenses. First, he contends that he
was an at-will employee and, therefore, did not have an employment contract with Phase 3.
Moreover, he argues that he was not subject to any restrictive covenants, non-compete or
confidentiality agreements. (Drake Affidavit at ifif 2-5). Second, he contends that any information
or material that he has used with his new employer was not confidential or otherwise in breach of
his duty of loyalty. As such, the Court is satisfied that Defendant has presented a meritorious
defense to the underlying Complaint.
3. Culpability

Finally, the Court must consider whether the default was due to Defendant's culpable
conduct. $55,518.05 in US. Currency, 728 F.2d at 195. In the Third Circuit, "culpable conduct"
requires a finding of"willfulness" or "bad faith" on the part of the non-responding defendant. Hritz
v. Woma Corp., 732 F.2d 1178, 1182 (3d Cir. 1984).

"Reckless disregard for repeated

communications from plaintiffs and the court, combined with the failure to investigate the source
of a serious injury, can satisfy the culpable conduct standard." Id. at 1183. However, failure to file
an answer to a complaint, though inexcusable, does not constitute "flagrant bad faith." Emcasco,
834 F.2d at 75 (citing Nat'! Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 643 (1976)).
Here, Defendant contends he was under the impression that the parties would be able to
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settle the matter and, as such, an answer would not be necessary. However, when the parties were
unable to reach an agreement, it was only then that Defendant learned that DG3 would not continue
represent him in the litigation and that he would need to retain his own counsel. Although it
remained Defendant's responsibility to timely respond, there has been no showing of bad faith or

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intentional noncompliance. In fact, less than three weeks after the entry of default, Defendant filed
the present motion and proposed answer to Plaintiffs Complaint. As such, the Court finds the
third factor in Defendant's favor.
In sum, the Court finds that ( 1) Phase 3 will not be prejudiced if the default is vacated; (2)
Defendant has presented facially meritorious defenses; and (3) Defendant's failure to answer the
complaint was not made in bad faith. Therefore, Defendant's motion to vacate default judgment
is granted.
ORDER

Having carefully reviewed and taken into consideration the submissions of the parties, as
well as the arguments and exhibits therein presented, and for good cause shown, and for all of the
foregoing reasons,
IT IS on this

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day of~' 2018,

ORDERED that Defendant's Motion to Vacate Default and File an Answer or Responsive
Pleading (ECF No. 8) is GRANTED; and it is further
ORDERED that an Answer or Responsive Pleading must be filed by June

PETER G. SHERIDAN, U.S.D.J.

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Y, 2018.